European Central Bank’s historic pledge on climate
The European Central Bank (ECB) has been under increased pressure from civil society and politicians to take action on climate change. Sign of the acceleration that we are witnessing on all fronts, it disclosed in advance its new action plan to include climate change considerations in its monetary policy strategy. This announcement follows 18 months of work, which began after the announcement in January 2020 of the institution's first strategic review in 18 years. There is growing consensus, including among Member of the Executive Board of the ECB, that “a supposedly “neutral” market allocation may be suboptimal in the presence of externalities” and that therefore, “it seems appropriate to replace the market neutrality principle by a market efficiency principle”.
The results of this strategic review, released on July 8, 2021, are historic in more ways than one:
- It is the first strategic review of the institution since 2003;
- The ECB has a new inflation goal of 2% (before this goal was “below, but close to, 2%”);
- The ECB is moving away from the "market neutrality principle", which had been the subject of much debate between those who argued that the fight against climate change was outside the ECB's role, and others who argued that this objective was perfectly in line with the ECB's mandate;
- For the first time since its creation, the ECB has decided to integrate climate change into its monetary policy strategy/considerations.
This announcement is part of a growing awareness of the impacts of climate change on prices and ﬁnancial stability among central banks. In recent years, there has been a shift in thinking, as evidenced by the integration of climate change into the strategy of central banks in China, Brazil or the United Kingdom. This movement is also visible in central banks’ asset purchasing programs. In November 2020, the Swedish central bank, Riksbank, announced its intention to include green considerations and to purchase more green bonds as part of its expanding assets purchasing programs. To our knowledge, this was the first time a Central Bank explicitly targeted green and sustainable assets.
Since Mark Carney's 2015 “Tragedy of the Horizon” speech that drew the financial community's attention on the relationship between financial stability and climate change, central banks have increased their commitments, notably in 2017 with the creation of the Network for Greening the Financial System (NGFS).
The publication of the ECB's climate agenda aims to respond to increasing civil pressure. In addition, multiple reports are calling for the decarbonization of the ECB’s monetary policy. In June 2021, Isabel Schnabel, Member of the Executive Board of the ECB, recognized that “The application of the market neutrality principle implies that ECB’s corporate sector purchase programme (CSPP) currently exhibits an inherent bias towards large firms in carbon-intensive industries. This emission bias appears to be driven by firms’ underlying issuance behaviour: large firms in carbon-intensive sectors are more likely to enter the bond market, which results in the ECB’s CSPP portfolio having a relatively high emission intensity”.
This new strategy reveals a paradigm shift, triggered by the arrival of Christine Lagarde (see our article in 2019, “Christine Lagarde sees climate change as “mission critical” for the ECB and opens the door to EU taxonomy-based asset purchases programs”). The current President of the ECB declared before she took office that "(...) any institution has to actually have climate-change risks and protection of the environment at the core of the understanding of its mission". Two months after taking office, she announced that the ECB would contribute to the fight against climate change within its mandate. In a recent speech on a “Green Capital Markets Union”, she declared that the ECB should support “the development of Green Capital Markets Union”.
In 2020, the ECB created a "climate change center" to define and guide its "climate agenda". The institution has also put in place several sustainability initiatives detailed in its annual report (i.e. incorporating climate risks into ECB’s models and forecasting methods; assessing the consequences of climate change for the conduct of monetary policy, for financial stability, as well as for the ECB’s own investment portfolios, green bonds gaining importance in the ECB’s asset purchase programmes etc.)
Integrating climate issues into monetary policy is reportedly fully in line with the ECB's mandate. According to the Treaties on European Union and on the Functioning of the European Union, which define the ECB's mandate, the ECB's role is not limited to price stability: "The primary objective of the ECB shall be to maintain price stability in the euro area. Without prejudice to the objective of price stability, the Eurosystem shall support the general economic policies in the EU with a view to contributing to the achievement of the objectives of the Union (…) These objectives include balanced economic growth, a highly competitive social market economy aiming at full employment and social progress, and a high level of environmental protection and improvement".
The long-awaited commitments from the ECB are detailed in a roadmap extending to 2024. The institution’s action plan lists several measures ranging from transparency of financial actors on their exposure to climate change, to risk assessment and to the eventual integration of environmental criteria in asset purchases.
ECB's general announcements:
1. Further incorporate climate change considerations into its monetary policy framework
2. Expand its analytical capacity in macroeconomic modelling, statistics and monetary policy regarding climate change
3. Include climate change considerations in monetary policy operations in the areas of disclosure, risk assessment, collateral framework and corporate sector asset purchases
4. Implement the action plan in line with progress on the EU policies and initiatives in the field of environmental sustainability disclosure and reporting
Table 1. Detailed commitments of the ECB
Areas of activity
Macroeconomic modelling and assessment of implications for monetary policy transmission
Accelerate the development of new models and conduct theoretical and empirical analyses to monitor the implications of climate change and related policies for the economy, the financial system and the transmission of monetary policy through financial markets and the banking system to households and firms
Statistical data for climate change risk analyses
Develop new experimental indicators, covering relevant green financial instruments and the carbon footprint of financial institutions, as well as their exposures to climate-related physical risks
Disclosures as a requirement for eligibility as collateral and asset purchases
Introduce disclosure requirements for private sector assets as a new eligibility criterion or as a basis for a differentiated treatment for collateral and asset purchases (detailed plan to be announced in 2022)
Enhancement of risk assessment capabilities
Conduce climate stress tests of the Eurosystem balance sheet in 2022; assess whether the credit rating agencies accepted by the Eurosystem Credit Assessment Framework have disclosed the necessary information to understand how they incorporate climate change risks into their credit ratings; develop minimum standards for the incorporation of climate change risks into its internal ratings
Consider relevant climate change risks when reviewing the valuation and risk control frameworks for assets mobilised as collateral by counterparties for Eurosystem credit operations; monitor structural market developments in sustainability products and stands ready to support innovation in the area of sustainable finance within the scope of its mandate
Corporate sector asset purchases
Adjust the framework guiding the allocation of corporate bond purchases to incorporate climate change criteria, in line with its mandate; Start disclosing climate-related information of the corporate sector purchase programme (CSPP) by the first quarter of 2023
Source: Press Release of the European Central Bank
The change is therefore significant, since from now on the ECB will consider the climate risk in the name of monetary and financial stability, at the heart of its mandate. The crucial question is how these considerations will materialize in ECB’s concrete actions. The publication of the results of its strategic review received mitigated sentiments among NGOs. Many observers welcome these preliminary announcements but a higher level of detail on the definition of the measures would help us understand how the ECB would concretely act. At present, there is too little detailed and quantified information in the action plan. The measures are essentially qualitative and of an imprecise nature. This is particularly apparent when the ECB states that it "will introduce disclosure requirements for private sector assets as a new eligibility criterion or as a basis for a differentiated treatment for collateral and asset purchases" or that it "will adjust the framework guiding the allocation of corporate bond purchases to incorporate climate change criteria, in line with its mandate". These phrases are still vague and do not give any indication of the volume and prices involved.
However, one expects the ECB to require from issuers to disclose Key Performance Indicators (KPIs) requested by the Taxonomy Regulation or the Corporate Sustainability Reporting Directive (CSRD). The ECB has begun to amend its collateral framework, for example by including innovative financial products as eligible collateral (acceptance of sustainability-linked bonds), or by linking the eligibility as collateral to more comprehensive disclosures, reflecting European legislation such as the Corporate Sustainability Reporting Directive (CSRD).
The information asked to Sustainability-linked Bond Issuers to become eligible as collateral for Eurosystem credit operations and for outright purchases illustrates what information may be requested (see our previous article "European Central Bank accepts sustainability-linked bonds as collateral"). The ECB requires disclosure on targets set by the issuer in a publicly available issuance document (e.g. prospectus, offering circula and/or final terms) that measure quantified improvements in the issuer’s sustainability profile over a predefined period. More specifically, it requires a mapping of the sustainability targets with the environmental objectives set out in Regulation (EU) 2020/852 and/or with SDGs set by the United Nations relating to climate change or environmental degradation.
 “The ECB must act now on climate change” Letter from more than 150 academics, economists and activists, available here.
 The review should have been published in autumn after some delay due to the pandemic.
 See press release “ECB launches review of its monetary policy strategy”, available here.
 See Isabel Schnabel’s speech “From market neutrality to market efficiency”, available here.
 “One key principle underlying the implementation of the PSPP is the minimisation of unintended consequences, which can be ensured by obeying the concept of market neutrality”. The market neutrality principle was mentioned by Benoît Cœuré, former Member of the Executive Board of the ECB, in 2015. See Cœuré, B. (2015), “Embarking on public sector asset purchases”, 10 March, available here. The principle of market neutrality lies in roles repartition among public policies. The goal of monetary policy is to safeguard price stability while it is up to macro-prudential policy to assess financial stability risks and increase the resilience of the financial system against shocks. Market neutrality proscribes the ECB from preferring one sector over another and to avoid market distortion by intervening on purpose (i.e. “by design”) in specific market segments. Economic orthodoxy on this matter affirms that it does not fall within the mandate of Central Banks to discriminate between assets (be it favoring or penalizing) based on environmental criteria.
 See the speech of Isabel Schnabel “From market neutrality to market efficiency” in June 2021, available here.
 See our article on the subject here.
 In his 2015’s speech, Mark Carney explained the three broad channels through which climate change can affect financial stability: physical risks, transition risks and liability risks. See full speech here.
 At the Paris “One Planet Summit” in December 2017, eight central banks and supervisors established the NGFS. The Network’s purpose is to help strengthening the global response required to meet the goals of the Paris agreement and to enhance the role of the financial system to manage risks and to mobilize capital for green and low-carbon investments in the broader context of environmentally sustainable development. To this end, the Network defines and promotes best practices to be implemented within and outside of the Membership of the NGFS and conducts or commissions analytical work on green finance.
 See Politico’s article “Greenpeace lands on ECB tower in climate finance protest”, available here.
 See full speech here.
 See p.10 of the Public Hearing of the Economic and Monetary Affairs Committee of the European Parliament, available here.
 ECB’s annual report available here.
 On February 2021, the ECB announced that the Eurosystem aims to start making annual climate-related disclosures for its non-monetary policy portfolios within the next two years, using the recommendations of the TCFD as the initial framework. Several Eurosystem central banks already make climate-related disclosures for some of their non-monetary policy portfolios.
 See our article on the subject here.
 See Article 127 of the Treaty on the Functioning of the European Union, available here.